Buy
the rumour

'Buy
the rumour, sell the fact.'

This old
adage is truer than most. Unfortunately, it reflects
the fact that the market is driven to a greater than
desirable extent by inside information. This is life
and like the worlds oldest profession, it is hard
to see how it will ever be fully legislated away.

What happens
is that when good news is about to break, some people close to the company
inevitably let it slip to their friends, or even arrange some surreptitious
buying for themselves. A rumour often leaks out into the market that a particular
announcement or deal is on the way. The share price rises, often accompanied
by a query from the corporate plod, as people privy to the rumour get set.
The company usually replies to the standard ASIC query with standard answers,
to the effect that they are not aware of any reason for the rising price.

When
the good announcement finally hits the market however,
(surprise, surprise) the psychology shifts. Instead
of thinking, 'that's good news, let's buy the stock',
the majority thinking goes more along the lines of,
'that's it, the news is out...time to take our profit'.
So, apparently perversely, the stock price often falls,
leaving the inexperienced punter perplexed. It must
be a common occurrence for brokers to take calls from
such people, asking why seemingly good news has been
so poorly received by the market.

The thing
to never lose sight of is that stocks do not rise
or fall because they are 'good' or 'bad', they
rise or fall because of an imbalance of buyers and
sellers, which is caused by the perception
that they will rise or fall, which in turn is somewhat,
but not entirely, based
upon whether they are 'good' or 'bad' value.

Sometimes
when I hear some market pundit proclaiming that Westpac
rose a few cents on hopes of a rate cut, when the
day before they fell a few cents, I just want to yell,
'Tell
the truth for goodness sake, you don't really know
why it rose today! The sun was shining and more people
wanted to buy than sell'.